REPUBLIC OF CYPRUS - Greek Cypriots should expect to pay higher social security contributions and face tougher claims terms at retirement, under proposals for reform of the Greek Cypriot pensions system.

Details of a five-year stability programme report just published by the Republic of Cyprus acknowledge total State pensions expenditure are expected to climb to 7.5% of GDP within by 2010 to meet current funding needs, and look set to be as much as 16.1% of GDP by 2050, because 2004-05 life expectancy rates showed men lived 8.4 months longer than anticipated and women lived 10.8 months longer and more funding is therefore needed.

As a result, the government has suggested it needs to increase individuals' social security contributions by 1.3% every five years between 2008 and 2037, in order to limit bring down pensions expenditure as a baseline percentage of GDP, albeit this still "does not halt the emergence of mounting deficits in the social security accounts" caused by pensions funding and other aspects of the State benefits system.

Moreover, claiming State pensions benefit is likely to become tougher too, as stricter eligibility requirements mean a minimum of 15 years contributions to obtain the ‘old-age pension' - which could amount to 11.1% of GDP by 2050 - from the current 10 years, alongside tighter rules requiring six years of contributions in order to receive payment of a lump sum at age 68, in cases where people who are eligible for the State pension at 65. This compares with a current requirement of three years.

Perhaps more importantly, the government said while there has been discussion in the industry about increasing the pensionable age from 63 - having already raised it in 2005 - it has so far failed to reach a consensus about lifting it to 65.

Further information about these proposals suggests the Cypriot government has tested the impact of these scenarios if implemented, and found "the phased increase in social security contribution rates raises the government revenue to GDP ratio to 3.5 percentage points by 2050 while pension payments as a ratio to GDP, fall by one percentage point compared with the revised base scenario".

The report continues: "With the ending of increases in contribution rates in 2037 and pension payments to immigrants rising as they reach retirement age towards the last years of the projection period, the reserve ratio begins falling, indicating that reforms need to be sustained and even intensified over the long-term."

While this report deals with required reform to the State pensions regime, Cyprus has still to provide a legal framework for pension funds, many of which are seriously underfunded defined benefit schemes in the case of semi-state institutions, such as utilities, or defined contribution arrangements. (see earlier IPE feature: Moving to diversity)

The Republic of Greece needs to tackle its retirement funding swiftly as a report as its financial modelling shows the region will be in a financial deficit under current spending, and this is a scenario the European Union is unlikely to tolerate once the Republic of Cyprus converges on January 1, 2008.

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